4 Ways to Profit From Silver's Explosive Growth

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Includes: AGQ, PSLV, SIL, SLV
by: Everyday Finance

With silver at decades-long highs, an obvious question one has to consider is whether this is a bubble ready to burst, a continuation of a secular bull trend, or simply that this is another efficient market example where prices do reflect the appropriate value based on all market information known at this time. Depending on the financial guru, you’ll get varying replies. So, rather than try to convince you one way or the other, I’ll just share a few ways to make money on silver if it continues its ascent and you can decide which opportunity is right for you:

  • SLV – iShares Silver Trust – Up 31% YTD – The obvious first-stop investment for silver exposure is this ETF based on the spot price of silver. What gives some investors pause is the notion that that fund custodian does not have physical custody of all the silver required to match the market cap of the ETF. While iShares is a reputable name and many professional money managers and hedge funds hold SLV long, there’s a market for physical silver as you’ll see next. In addition, SLV is taxed at higher rates than other silver investments below for reasons outlined here (precious metals tax rates). For that reason alone, some investors steer clear of SLV and focus on getting a lower tax rate on long-term capital gains through other means.
  • PSLV – Sprott Physical Silver Trust – Up 34% YTD – The Sprott physical silver trust plays on the emotions of investors that fear other ETFs couldn’t actually meet redemption amounts if there were a run on silver and want the capability to take physical custody of their share of holdings in the metal. As onerous and impractical as it may be to do so, the mere notion that such opportunity is afforded to investors, along with different tax treatment, has given this fund a decent premium over the net asset value of its holdings. Personally, I like to watch for the premium to spike and benefit from a low-risk, medium return pairs trade on both gold and silver. As outlined in more detail, the pairs trade is enacted when the premium spikes above the mean, you short PSLV and go long SLV. To date, the premium has always reverted to the mean.
  • AGQ – ProShares Ultra Silver 2X – Up 64% YTD - This 2X daily leveraged silver ETF has enjoyed an incredible run, up over 60% year-to-date. This tool is purely a method to exploit trends and near-term trades. While this one has actually roughly doubled the months-long return on the underlying silver proxy, that is rare in the world of leveraged ETFs. In fact, investors can often short leveraged ETFs as outlined in detail at SeekingAlpha by either shorting both sides of the trade and watching value decay, or even just shorting long-only ETFs since the general trend markets is to increase.
  • SIL – Global X Silver Miners – Up 15% YTD – This ETF is composed of companies who derive substantial revenues from silver mining. While many of them mine other base metals, precious metals, and even rare earth metals ETF does lend some diversification outside pure silver returns and includes the operational aspect of miners. SIL has not kept pace with SLV in returns YTD, but presumably, would also see a more muted decline should the silver bubble burst as well. Tax rates on this ETF would be at the normal equities rates since there’s no physical silver involved, just corporations that mine silver.

Disclosure: Short AGQ in leveraged ETF short position.